Dimmock Dry Dock Services is considering installation of a new dry dock facility. There are two competing propositions. The first plan would cover two acres of waterfront land and be capable of servicing fifteen boats at the same time. This plan would require purchase of land adjacent to Dimmock’s present facility. The second plan is more modest and involves replacing the present facility with a modernized dry dock capable of handling eight boats at a time. The initial outlays and net cash flows over the firm’s planning period are shown below.

(a) Calculate the expected net present value, the internal rate of return, and the profitability index for each plan.

(b) Advise Dimmock Dry Dock as to which plan they should implement, supporting your anal¬ ysis with explicit recognition of the underlying assumptions.

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Initial costs Expected NCFAT Year 1 Year 2 Year 3 Year 4 Year 5 Salvage value Opportunity discount rate First Plan $1,580,000 Second Plan $750,000 350,000 200,000 500,000 250,000 600,000 300,000 600,000 300,000 600,000 300,000 500,000 250,000 18% 15%